Offshore Field of Dreams: Israel’s ‘Gassy’ Opportunity

by Aaron Levitt | July 23, 2013 10:08 am

Most investors flock to Israel for its technology prowess. After all, the nation has the highest rate of start-up companies in the world, leads the world in patent registrations per capita and is home to such space-age industry leaders as Teva Pharmaceuticals (TEVA[1]) and Check Point Software (CHKP[2]).

However, recent innovations in hydraulic fracturing and advanced drilling techniques[3] could make the tiny Middle Eastern nation an oil and gas powerhouse. New deepwater offshore fields are helping shape Israel’s energy renaissance and potentially could turn the country from an energy importer to net exporter by 2016.

For investors, Israel’s energy production represent a high-growth opportunity for its economy and portfolios.

The Tamar & Leviathan

Due to the nation’s lack of oil reserves, Israel has been forced to fund its economy — the third-largest in the Middle East — via alternative means. As its neighbors like Kuwait, Egypt[4] and Saudi Arabia have dug down into the sand for energy, the great tech miracle has launched Israel into the forefront of several high-tech industries including pharmaceuticals, aerospace, information technology and software.

But as we’ve seen here in the United States, advanced drilling techniques change everything.

During the past five years, firms using deepwater horizontal drilling have found enough gas to turn Israel into an energy exporter. That’s huge, as the nation currently spends about $10 billion a year to import 98% of the oil it uses.

Back in April, natural gas from Israel’s monster offshore Tamar field began to flow into the country’s energy grid after two years of crippling gas shortages. That field — which is located roughly 90 kilometers off Israel’s northern coast — has an estimated 9 trillion cubic feet[5] of natural gas. That’s roughly enough reserves for Israel to meet its own needs for decades.

And the nation has had even more natural gas discoveries in recent years.

The Leviathan field was first unearthed back in 2010. This field boasts an estimated 16 to 18 trillion cubic feet of gas and has been considered of the one of the world’s largest offshore gas finds in nearly a decade. The Leviathan continues to yield surprises as initial ultra-deepwater seismic tests have shown that the field could hold as much as 1.5 billion barrels of crude oil[6] — equal to about 15 years of Israeli demand.

These two fields — plus the Dalit — are just a portion of the huge reserves that lie in the Levant Basin. According to the United States Geological Survey, this region in the Mediterranean holds an estimated 122 trillion cubic feet of recoverable natural gas[7] and roughly 1.7 billion barrels of crude oil. Add in recent upwards revisions for the Yam Hadera offshore block — at a 208 million barrels of oil and 3.4 trillion cubic feet of natural gas — and you can see just how big Israel’s energy potential is.

Overall, these finds put Israel’s natural gas reserves among the 25 largest in the world.

With energy added to its mix of high-tech, Israel has the potential to transform its economy even further. According to the Bank of Israel, the newly started natural gas flows from Tamar field will contribute about 1% to the nation’s gross domestic product. Including those contributions from natural gas, the country’s central bank is now forecasting that the economy will grow 3.8% this year. Aside from improving the nation’s current account balance by as much as $3 billion, the Israeli government expects to save $274 million each month on costs related to importing energy.

Playing The Israeli Abundance

Israel’s energy renaissance is real and could be great growth opportunity for investors with long-term horizons.

The obvious play is the iShares MSCI Israel Index ETF (EIS[8]). The GDP boost from tapping these natural gas and oil resources and potentially exporting them down the road will do wonders for its economy and strengthen Israel’s position as a powerhouse in the Middle East.

However, the ETF’s 63 holdings fall flat in the energy department — with less than 5% dedicated to the sector. That makes EIS a more macro-play on the Israeli economy rather than a play on energy production. Not to mention that there is some geopolitical risk — it is the Middle East after all — with owning stocks in the nation.

To that end, investors might feel better with a position in a more local name.

That local name would be oil and gas producer Noble Energy (NBL[9]). The firm has been operating in offshore Israel since 1998 [10]and holds the largest stakes in the Leviathan and Tamar fields, giving it plenty of room to prospect in the region. Its latest efforts include drilling 4 miles below the seabed — with Israel’s deepest well — to target the Leviathan’s rich oil reserves.

Noble isn’t as cheap as some other independent energy producers such as Hess (HES[11]) or Denbury Resources (DNR[12]). Nonetheless, NBL represent the single best way to tap Israel’s emerging oil and gas riches.

For investors, paying the slight premium could be worth it over the long haul as these mammoth fields are tapped. At the same time, the energy firm’s broad expanse of holdings helps limit the geopolitical risk of operating in the Middle East.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.